My Lords, I beg to move that these draft regulations, which were laid before the House on 21 March 2024, be approved.
The Joint Committee on Statutory Instruments and the Secondary Legislation Scrutiny Committee have provided a very helpful review of these regulations and, I am pleased to say, have not drawn any special attention of this House or the other place to them. These regulations amend the regulations underpinning the contract for difference scheme. The CfD scheme is the Government’s main mechanism for supporting new low-carbon electricity-generating projects in Great Britain. It has been hugely successful in driving down deployment costs and driving up the share of renewable energy in the UK.
These amendments are about providing extra funding support through the CfD so that we can better support offshore and floating offshore wind supply chains. Offshore wind in particular is a critical industrial sector. It has been hard-hit by inflationary pressures and supply chain disruption resulting from the Russian invasion of Ukraine. Consequently, necessary investments in manufacturing and infrastructure have been delayed or, in some cases, abandoned altogether.
As the CfD currently focuses on prices of deployment and no other factors, offshore wind developers are incentivised to use the cheapest supply chain options available, regardless of where in the world or how dirty their means of production. We are therefore introducing sustainable industry rewards—SIRs—to rebalance CfDs, to address some of these supply chain challenges which are already causing bottlenecks in the supply chain, further increasing costs and slowing down deployment. This policy intervention has
understandably been much welcomed by supply chain companies. It is intended to take effect for the seventh CfD allocation round, which should take place in 2025.
How does this policy work? These regulations require all offshore wind and floating offshore wind CfD applicants, as a condition of entry to the CfD, to obtain an SIR statement from the Secretary of State. Those applicants who obtain an SIR statement will receive additional revenue support through the CfD—a top-up, as it were—for investing in the economic, social and environmental sustainability of their supply chains. SIR statements are obtained if applicants make successful SIR proposals that fulfil one of two sustainability criteria. One is investment in shorter supply chains in UK deprived areas. This means investing in manufacturing in the most disadvantaged parts of the United Kingdom. The other is investment in more sustainable means of production. This means investment in manufacturers who have signed up to the Science Based Targets initiative for the reduction of carbon emissions.
The mechanism to allocate SIR funding will be a competitive auction just before the main CfD auction. An applicant that obtains SIR funding will be contractually obliged to deliver their commitments; undelivered commitments will be subject to a system of performance adjustments. SIRs will make more expensive but more desirable investments from offshore wind developers cost-neutral, and therefore will not impact the main CfD auction, held shortly after the allocation of SIR funding.
Noble Lords should note that the regulations provide the powers to run the SIR allocation. The explicit, detailed rules of that allocation are set in the draft SIR allocation framework that was released in parallel to these regulations. The regulations replace the current supply chain plan process for offshore wind and floating offshore wind. The Government are very conscious that this extra support for offshore wind will have an impact on consumers’ electricity bills as, like the rest of the CfD scheme, SIRs will be funded through the existing electricity supplier obligation levy, which electricity suppliers pay.
The actual budget for SIRs is still being discussed with the Treasury. However, we estimate it could be in the region of £150 million to £300 million per year, for no more than three years, subject to the number of applicants. The impact on consumer bills will be very small, in the region of £2 per year per consumer. I hope that noble Lords will agree that £2 a year per consumer is a small price to pay for the benefits that sustainable industry rewards could bring to UK communities, through creating new and cleaner manufacturing facilities in deprived areas, alongside highly skilled jobs or carving out opportunities for businesses to become part of the offshore wind supply chain.
To ensure that the policy does not become a permanent burden on consumer bills, our proposal is that the intervention is time limited for three years; it is there to address specific market failures. The SIRs work as a prerequisite to the CfD for offshore wind, although applicants will have access to the main CfD round as long as they meet a required minimum standard of investment in their supply chain. The SIRs also complement other government support for renewable
supply chains, such as the £1 billon Green Industries Growth Accelerator, which runs to a similar timeframe. I beg to move that these regulations are approved by the Committee.